BANK RECONCILIATION STATEMENT

LECTURE 14 BY HINA SAMDANI

There are two records of business accounts:

 

Its cash accounts in its general ledger Bank statement which tells the actual amount of cash the business has in the bank.

Two balances are seldom the same. Therefore, necessary to make the balance per books agree with the balance per bank.


A process called Reconciling the bank account.

IMPORTANCE OF BANK RECONCILIATION

Usual and valued practice for all business concerns. Important mechanism of internal control of cash inflow and outflow. Brings into focus errors and irregularities.

NEED FOR BANK

Reflects the actual bank balance position. Helps to detect any mistake in cash general and bank account balances. Prevents fraud in recording the banking transactions. Explains any delay in collection of checks. Identifies valid transactions recorded by one party and not by the other.

CAUSES OF DIFFERENCES
The lack of agreement between the two balances is due to: Time Lags: Prevent one of the parties from recording the transaction in the same period. Transactions: For some transactions banks have earlier knowledge and adjusts records before the business. Errors: By either party in recording transactions.

ITEMS THAT CAUSE DIFFERENCES

Items recorded by the company but not yet recorded by the bank:
a)

b)

DEPOSITS IN TRANSIT: Company has recorded these deposits but the bank has not. OUTSTANDING CHECKS: These checks have been issued and recorded by the company but have not yet been paid by the bank.

Cont
Items recorded by the bank but not yet recorded by the company.
a)

b)

c)

BANK COLLECTIONS: Bank collecting money on behalf of the customer. SERVICE CHARGE: This is the banks fee for processing the depositors transactions. INTEREST REVENUE: Banks pay interest to depositors which depositors recognize when they get bank statement.

Cont.
d) NONSUFFICIENT FUNDS (NSF) CHECKS: Checks received from customers with insufficient balance. e) CHECKS RETURNED TO PAYEE BY THE BANK:
    

Makers account closed Date is stale Unauthorized signature Altered check Improper form of check

Cont.
ERRORS: By either the company or the bank.


Bank improperly charging the Bank balance of Business Research Associates for a check drawn by another company Business Research Inc.

STEPS IN PREPARING BANK RECONCILIATION STEP 1: Start with the two figures:
 

The balance shown on the bank statement The balance in the companys cash account.

These two will disagree because of because of the timing differences.

Cont....
STEP 2: Add to, or subtract from, the bank balance those items that appear on the books but not on the bank statement. a) ADD: Deposit in transit to the bank balance.
These are identified by comparing deposits listed on bank statement to the company list of cash receipts.

Cont.
b) Subtract: Outstanding checks from the bank balance.


These are identified by comparing the canceled checks returned with the bank statement to the company list of checks in the cash disbursement. They show up as cash payment on the books but not as paid checks on the bank statement.

Cont.
STEP 3: Add to, or subtract from, the book balance those items that appear on the bank statement but not on the company books: ADD: To the book balance
Bank collections Interest revenue earned.
 

These items are identified by comparing the deposits listed on the bank statement to the company list of cash receipts. These show up as cash receipts on the bank statement but not on the books.

Cont.
SUBTRACT: From the book balance
Service charges Any other bank charges (charges for NSF, stale charges)


These items are identified by comparing the other charges listed on the bank statement to the cash disbursements recorded on the companys books. They show up as subtraction from the bank statement but not as cash payments on the books.

Cont.
STEP 4: Compute the adjusted bank balance and the adjusted book balance. The two adjusted balances should be equal. STEP 5: Journalize each item in Step 3, i.e. each item listed on the book portion of the bank reconciliation. These must be recorded on the company books because they affect cash.

Cont.
STEP 6: Correct all book errors and notify the bank of any errors it has made.

RECORDING ENTRIES FROM THE RECONCILIATION

Jan 31 Cash 2114 Notes receivable 1,900 Interest revenue 214 Notes receivable collected by bank. Jan 31 Cash 28.01 Interest revenue 28.01 Interest earned on bank balance.

Cont.
Cash 360 Account payable-Brown Co. 360 Correction of check register, check no.333. Miscellaneous Expense Cash Bank service charge. Accounts receivable L.Ross Cash NSF check returned by bank. 14.25 14.25

52 52